Guerite’s objective is to earn positive absolute returns for its clients through a strategy designed to both increase and preserve capital – the Guerite Strategy. The Guerite Strategy consists of two important components:
Guerite’s focus on capital preservation sets it apart from a long-only, buy and hold investment strategy. Buy and hold strategies that focus solely on capital appreciation are limited in their ability to combat capital losses during periods of market decline. The Guerite Strategy uses these two components to reduce volatility and earn positive absolute returns for clients, even during periods of market weakness.
The Guerite Strategy is designed to protect, or hedge, investors’ capital during periods of high-risk market conditions and to allow clients to assume either unhedged or leveraged market risk during normal-risk market conditions. The Guerite Strategy is a two-step process. The first step is to identify economic and market conditions, which in the past, on average, have resulted in a higher probability of market declines. The second step is to initiate a proactive response that is designed to preserve clients’ capital during these high-risk periods.
The Guerite Indicator is a proprietary economic model that is designed to identify both high-risk and normal-risk market conditions. When the Guerite Indicator signals high-risk market conditions, Guerite implements a partially or fully hedged Index Options structure to protect capital against market risk.When the Guerite Indicator signals normal-risk conditions, Guerite will not typically hedge against market risk. When appropriate during normal-risk periods, Guerite may use an Index Options structure that has the potential to compound, or leverage, market advances.
The Guerite Strategy can be applied to any U.S. equity portfolio. The Index Options structure is independent from the equity portfolio, so the equity portfolio can be composed of individual stocks, ETF's, mutual funds, or any combination. Additionally, the equity portfolio can be changed or adjusted without affecting the Index Options structure. Likewise, the Index Options structure can be increased or decreased without affecting the equity portfolio. When hedged against market risk, the equity portfolio creates a tax-efficient, cash-like position, without the need to liquidate or alter the underlying portfolio.
A fully hedged position will create a cash-like position that earns roughly the three-month Treasury rate. However, the return on the cash-like position will differ from the three-month Treasury rate by the extent -- positively or negatively -- to which the underlying equity portfolio being hedged outperforms (or underperforms) the market index. The Guerite Strategy does not short the market or take a bearish position, per se. The Guerite Strategy’s most defensive position is to fully hedge a long equity portfolio against market risk, but never to create a net short position.
With leveraged exposure to the market, the equity portfolio compounds market advances (and market declines). The Guerite Strategy's most aggressive position would be to double the equity portfolio's exposure to market risk. With such an investment position, market advances (and declines) would be doubled.
The Guerite Strategy, versus a buy and hold strategy, has been shown to be particularly effective during secular bear markets. A secular bear market is characterized by a long-term “sideways” movement of the stock market created by declines and rebounds within a range. The Guerite Strategy's absolute return focus is designed to preserve capital during the periodic declines and to participate in the subsequent rebounds.
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